i need Solution of Part a,b,c Question 1A small open economy with perfect capital mobility is characterised by the followingequationsM = 2Ỹ – 50iS1+1 – Si; - i =Assume that the nominal money supply M; is 80, output Ÿ is 22, and that the foreigninterest rate is i; is 0.08. In the long-run, we have o = 1 whereSPAnd the foreign price level P* is 4.2.a) Identify and explain the equations above.b) Draw the MM and PPP schedules, explaining why their slopes are positive ornegative.c) Calculate the long-run equilibrium values for S and P.d) Suppose we are at this long-run equilibrium but now the central bank increasesthe nominal money supply by 5%. Calculate the new long-run equilibrium.e) What happens to the nominal exchange rate S, in the short-run?f) Explain intuitively why overshooting takes place. How much overshooting hastaken place in this example?

The Money Model is an economic framework used to analyze the exchange rate determination in an open…

A small open economy with perfect capital mobility is characterised by the following equations M₁ = 2Ỹ - 50i St+1-St St Assume that the nominal money supply M, is 80, output Y is 22, and that the foreign interest rate is i; is 0.08. In the long-run, we have o = 1 where

A small open economy with perfect capital mobility is characterised by the following equations M₁ = 2Ỹ - 50i St+1-St St Assume that the nominal money supply M, is 80, output Y is 22, and that the foreign interest rate is i; is 0.08. In the long-run, we have o = 1 where

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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c. Consider a period when, prior to euro entry, the central bank of Lithuania maintained an exchange rate band relative to the euro-at the time this was a prerequisite for joining the Eurozone. The rules said that Lithuania had to keep its exchange rate within ±15% of the central parity of 3.4528 litas per euro. Compute the exchange rate values corresponding to the upper and lower edges of this band. Suppose PPP holds. Assuming Eurozone inflation was 2% per year and inflation in Lithuania was 6%, compute the PPP-implied rate of depreciation of the lita. Could Lithuania maintain the band requirement? For how long? Does your answer depend on where in the band the exchange rate currently sits? A primary objective of the European Central Bank is price stability (low inflation) in the current and future Eurozone. Is an exchange rate band a necessary or sufficient condition for the attainment of this objective?
Question 1 A small open economy with perfect capital mobility is characterised by the following equations M = 2Ỹ – 50i S1+1 – S i; - i = Assume that the nominal money supply M; is 80, output Ÿ is 22, and that the foreign interest rate is i; is 0.08. In the long-run, we have o = 1 where SP And the foreign price level P* is 4.2. a) Identify and explain the equations above. b) Draw the MM and PPP schedules, explaining why their slopes are positive or negative. c) Calculate the long-run equilibrium values for S and P. d) Suppose we are at this long-run equilibrium but now the central bank increases the nominal money supply by 5%. Calculate the new long-run equilibrium. e) What happens to the nominal exchange rate S, in the short-run? f) Explain intuitively why overshooting takes place. How much overshooting has taken place in this example?
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1 Suppose that due to a fall in the world interest rate, the equilibrium consumption of trad- ables, CT (r∗, QT1 , QT2 ), increases by 10 percent. Assume that prior to the fall in the world interest rate the economy was operating at full employment. Show that the equilibrium real wage also increases by 10 percent. Show that this result is independent of the exchange rate arrangement. To answer this question, you can use a graphical or a mathematical approach.
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Suppose that the six-month interest rate in the United States is 6%, while the six-month interest rate in Mexico is 8%. Further, assume the spot rate of the peso is $0.20. Suppose that you have $500,000 with which to attempt covered interest arbitrage. Assume the forward rate is $0.19630, as you just calculated, and the interest rates are the same as have been used throughout this problem. To start, you exchange your $500,000 (at the spot rate of $0.20) for 2,500,000peso. After depositing these funds for 6 months, and earning a return of 8%, your deposit grows to 2,700,000peso. When you convert your 2,700,000peso back to dollars, you end up with approximately over your original $500,000. However, had you simply deposited your $500,000 in an account and accrued 6% interest, you would have This example illustrates that covered interest arbitrage domestic account under interest rate parity. for a profit of about ▼, for a profit of offer a significantly larger return than simply depositing…
The economy of Rabbit is operating according to the following IS-LM-PC model: IS equation: Y - CIY - T) + (Y,r+ x) + G LM equation: r7 PC equation: a(-1) (a/L) (Y - Y) where at-1) is the inflation from the previous period and Y, is the potential output. Suppose that the economy is at its potential output. Then, the government raises taxes to close the budget deficit. What would happen to this economy in both short- and medium run? O IS curve shifts left. Output falls below potential output and inflation rate rises above the last year's inflation. The Fed can cut the interest rate to move the economy back to the potential output in the medium run. Then, inflation would be decelerating IS curve shifts left. Output falls below potential output and inflation rate falls below the last year's inflation. The Fed can raise the interest rate to move the economy back to the patential output in the medium run. Then, Inflation would be stable. O IS curve shifts left. Output falls below potential…